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Fitch Affirms Boston Scientific's IDR at 'BBB-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Boston Scientific Corp.'s (NYSE: BSX) long-term IDR at 'BBB-' with a Stable Outlook. A full list of BSX's ratings follows at the end of this release. The rating action applies to approximately $4.25 billion of debt.

KEY RATING DRIVERS:

--Fitch expects BSX will operate with relatively stable leverage (total debt/EBITDA) of 2.3x-2.5x during the next 12 months, despite a challenging operating environment. However, current leverage of 2.44x at March 31, 2014 leaves only modest flexibility within BSX's 'BBB-' rating category.

--Fitch forecasts that BSX's improving operational performance will generate consistently solid FCF, given relatively manageable CAPEX requirements. BSX is expected to maintain adequate liquidity through revolver availability and access to the capital markets.

--BSX's Implantable Cardioverter Defibrillator (ICD) and drug-eluting stent (DES) segments are expected to gradually improve, as (i) procedure volumes stabilize, (ii) the company introduces new products into the space that offer opportunities for incremental share gains and margin support and (iii) growth in emerging markets begins to contribute more significantly to revenues.

-- BSX's other business segments, which generate roughly 63% of BSX's total firm sales are expected to deliver, in the aggregate, solid single-digit growth.

--BSX has made progress in mitigating its litigation risk through settlements and some legal victories. Nevertheless, BSX is still facing a few legal actions that pose material financial risks.

--Fitch forecasts that BSX will generate $800 million to $900 million in free cash flow (FCF) during 2014 and prioritize cash deployment for targeted acquisitions and share repurchases.

STABLE OPERATIONS AND LEVERAGE IN NEAR TERM

Fitch expects that operational headwinds will moderate for BSX during the next 12 months as new product introductions help to support margins and revenue growth. This should also offset the negative effect of pricing pressures on existing products and moderate shifts in treatment paradigms.

Nevertheless, with leverage at 2.44x, BSX will need to keep debt levels basically flat, in order to maintain leverage within the 2.3x-2.5x range, leaving only modest flexibility within BSX's 'BBB-'' credit rating. Fitch does expect that improved growth and profitability will enable BSX to reduce leverage without significant reliance on debt reduction.

SOLID CASH FLOW FORECASTED

Fitch forecasts that BSX will generate $800 million to $900 million of FCF during 2014. Moderately improving sales and margins through new product introductions and continued cost control efforts are expected to drive solid cash flow from operations. Capital expenditure requirements for 2014 are forecasted to be manageable in the range of $240 million - $250 million. In addition, Fitch believes BSX will continue to generate consistently strong FCF during the intermediate term.

IMPROVING ICD AND DES SEGMENTS

BSX's ICD and DES businesses are expected to gradually improve during the next 12-24 months. The stabilizing of surgical procedures should continue to stabilize for both segments, driven by favorable comparisons of a multi-year period of soft procedure volumes resulting from the publication of negative clinical data identified in two large retrospective studies. BSX will continue to introduce new products into these two markets, offering the company a number of opportunities to increase share and revenue. Longer-term, BSX's investment in emerging markets is expected support revenue growth.

STEADY PERFORMANCE IN REMAINING SEGMENTS

Endosurgery, Neuromodulation, Peripheral Interventions and Electrophysiology are expected, in the aggregate, to deliver solid single-digit growth. These segments generate roughly 63% of BSX's total firm sales. The medical devices in these segments are experiencing decent growth and are not as highly priced as pacemakers and ICDs. Given the relatively smaller dollars at stake, payers do not appear as focused on price. In addition, Fitch expects BSX will continue to launch new higher-margin products in these respective markets. As such, Fitch believes that segment margins will remain somewhat stable.

IMPROVING BUT MEANINGFUL LITIGATION RISK

BSX continues to make progress in resolving litigation issues, resulting in an improved litigation risk profile during the past five years. However, some financial risk related to other litigation remains and BSX will need to prioritize cash accordingly for potential settlements. Fitch's rating action assumes there will be some cash settlements will be made by BSX. However, a significant judgment against the company regarding the JNJ contract lawsuit regarding the Guidant acquisition that would require meaningful debt could prove problematic for the company's credit rating.

CASH DEPLOYMENT FOCUSED ON GROWTH AND SHAREHOLDERS

Fitch believes BSX's acquisition strategy will remain targeted, focusing on areas that offer innovation and growth. BSX will likely balance share repurchases and acquisitions depending on the availability of attractive targets and in lieu of debt reduction. Fitch forecasts that BSX will generate $800 million to $900 million in FCF during 2014, which should be sufficient to fund targeted acquisitions and share repurchases. As such, Fitch does not expect significant increases in debt, absent large transactions.

ADEQUATE LIQUIDITY:

BSX has adequate liquidity provided by positive FCF and access to the credit markets. FCF for the latest 12-month period (LTM) ending March 31, 2014 was $837 million. At the end of the period, BSX had approximately $217 million in cash/short-term investments; nearly full availability on its $2 billion revolver which matures on April 18, 2017; and full availability on its $300 million 364-day accounts receivable facility which matures in June 2015. BSX had approximately $4.2 billion in debt, with roughly $400 million maturing in 2015, $600 million in 2016, and $250 million in 2017. Fitch anticipates that BSX will refinance its maturities with debt issuances rather than pay them down.

RATING SENSITIVITIES:

Positive: Future developments that may, individually or collectively, lead to positive rating action include the following:

--Continued operational improvements that support long-term positive revenue growth and margin stability/improvement;

--An operational profile that could lead to significant and durable increases in FCF;

--Cash deployment policy and resulting capital structure that would durably sustain leverage below 2.2x-2.3x.

Negative: Future developments that may, individually or collectively, lead to negative rating action include the following:

--Material and lasting deterioration in operations and FCF;

--Persistent increase in leverage approaching 3.0x;

--Leveraging acquisitions without the prospect of timely debt/leverage reduction;

--Large legal settlement(s) that would need to be funded with significant debt issuance(s).

RATING ACTIONS:

Fitch has affirmed the following ratings for BSX with a Stable Outlook:

--Long-term IDR at 'BBB-';

--Unsecured bank credit facility at 'BBB-';

--Senior unsecured notes at 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838738

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Contacts

Fitch Ratings
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Bob Kirby, +1 312-368-3147
Director
Fitch Ratings, Inc., 70 W. Madison St. Chicago, IL 60602
or
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Senior Director
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